Q2 2020 Health Catalyst Inc Earnings Call
Gentlemen, today's conference is scheduled to begin shortly piece continues to stand I think you pay patients.
[music].
To answer session asking a question. During this session you would need to press star one on your telephone.
Be advised that today's conference is being recorded.
Any further questions. Please press star Zero I would now like turn the conference. Your first speaker today, Adam Brown Senior Vice President of Investor Relations. Please go ahead Sir.
Good afternoon, and welcome to help catalyst earnings conference call for the second quarter of 2020.
Which ended on June Thirtyth 2020, My name is Adam Brown Senior Vice President of Investor Relations for Health catalog.
And with me on the call it Dan burden, our Chief Executive Officer, and Patrick Kelly, Our Chief Financial Officer.
I complete disclosure of our results can be found in our press release issued today as well as in our related form 8-K furnished to the FCC.
Both of which are available on the Investor Relations section of our website IR Dot Hill catalyst.
As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.
During the call we will make forward looking statements pursuant to the Safe Harbor provisions the private Securities Litigation Reform Act up 1995 regarding trends strategies the impact of the Kobin 19 pandemic on our business some results of operations.
Why conversion rates customer discounts on professional services and our general anticipated performance of the business.
These forward looking statements are based on management's current views and expectations as of today and should not be relied upon as representing or have you guys have any subsequent date.
We disclaim any obligation to update any forward looking statements or outlook.
Actual results may materially differ.
Please refer to the risk factors in our form 10-Q for the first quarter 2020 filed with the FCC on May 13, 2020, and our form 10-Q for the second quarter of 2020 that will be felt pieces.
We will also refer to certain non-GAAP financial measures to provided this.
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A reconciliation of these non-GAAP measures to their most comparable GAAP measures is provided in our press release.
With that let me turn the call over to Dan for his prepared remarks, and Patrick will subsequently provide his prepared remarks.
Denim Patrick will then take your questions.
Yeah.
Thank you Adam and thank you everyone, who is joined US this afternoon.
Let me first start by expressing our ongoing gratitude to our heroic national health systems and their frontline workers.
We're both grateful and honored that are health system customers have continued to trust us to meaningfully support them in this time great need.
Next let me share that the current cobot 19 surge likely indicates that our country and national health care system will be under some amount of strain over the coming months.
With that said we are highly encouraged as we continue to witness meaningful evidence that the health care provider ecosystem is significantly more well equipped and well prepared in responding in operating effectively in the midst of our new normal.
Lastly by way of introductory comments I would share that racial in equities remain at the forefront of our national conversation.
Help catalyst is committed to not only joining the many voice is calling for justice and change.
But also to using our data and analytics to create equity ability in health care. Specifically, we are committed to continuing to play a meaningful role and using data and analytics to support our customers and their efforts to better understand and resolve these disparities in health care.
I'll begin today's call by communicating our second quarter 2020 financial results first let me share than I am pleased with our performance across the board, especially in light of the macroeconomic backdrop.
To start I'm happy to report that old our total revenue for Q2 2020 was 43.3 million.
This represents an outperformance relative to the midpoint of our guidance.
Total adjusted gross margin in the second quarter was 49% an increase of approximately 20 basis points compared to the first quarter of 2020.
This quarter over quarter gross margin growth was achieved despite providing the koby 19 related professional services discounts, we discuss it on her last earnings call.
And our Q2 2020, adjusted EBITDA was a loss of 4.2 million, which also represents an outperformance relative to the midpoint of our guidance and shows an improvement from a loss of 5.7 million for the same period in the prior year.
Now, let me transition to some of the highlights from the quarter.
You'll recall from our previous earnings calls that we measure a company's performance in three primary strategic objective categories of improvement growth and scale.
We will discuss our quarterly results with you in each of these categories.
The first category improvement is focused on evaluating our ability to enable massive measurable improvements for our customers, while sustaining industry, leading satisfaction and engagement.
Oh for shared two examples recently documented customer improvements from newly published case studies. The first improvement been yet highlights our work with one of our customer supporting their journey to financial and operational recovery from covered 19, while the latter demonstrates the customers have widen their aperture.
And our back to leveraging our technology and services to do meaningful improvement work outside of their cobot 19 responses.
First.
Community Health network desired to understand the overall impact of covered 19 related declines in elective surgeries.
The data that community health network needed to understand that impact and prioritize the organizations elective surgery restart plan resided in disparate systems and would have required hundreds of hours a manual data review.
Does it help catalyst customer however, community health network leveraged das our data platform, along with our cobot, 19th specific financial impact recovery elective surgery application.
To gain insight and visibility into procedure trends, specifically our solution allowed community health network to visualize surgical case backlogs by the facility specialty and procedure. This enabled the identification of the number and type of procedures that are recoverable the ability to model.
The estimated revenue impact of cancellations.
And the use of analytics to understand the implications of different restart elective surgery strategies, enabling community health network to optimally meet its patients' needs and also effectively help and recover from covered 19 revenue losses.
Next let me highlight a recent improvement at banner health from their work outside of the realm of covered 19.
Banner health identified considerable variation in surgical supply use across its facilities.
The health system desire to data informed strategy that would allow it to maintain high quality outcomes, while simultaneously decreasing costs across its procedures system wide to.
To standardize supply use better utilize das along with a robust suite of analytics to help identify variation in high volume high cost surgical procedures.
Manner, then leverage those analytics to build standardized surgical preference cards for specific high volume procedures, allowing them to quickly realize 3.2 million in surgical supply cost savings.
Lastly, with any improvement Canterbury I'd like to highlight our team member engagement.
Every six months, we utilize the Gallup organization to measure our team members engagement levels.
In our most recent results we once again achieved a team member overall satisfaction score in the 99 percentile.
Well, we have consistently ranked between the 95 to 99 percentile in overall team member satisfaction scores. This past periods score the second highest in the company's history.
What's particularly encouraging as we adapted to.
Remote only culture.
As a leadership team.
We continue to make a deliberate decision to double down on our team member engagement efforts after the onset of the pandemic.
Our hypothesis was that if our team members can feel listen to and cared for at an extraordinary level. In this time of unique challenge. They will continue to brute produced outstanding work on behalf of our customers.
These gallup results, coupled with our customers high satisfaction levels throughout the pandemic.
Our heartening confirmation of our hypothesis coming to fruition.
Our next performance measurement category is growth, which we define is adding new customers, while also deepening existing customer relationships.
In the growth category with Cobot 19, as a backdrop I'll share a detailed update on the state of our company along with some broader perspective, it's about the health care delivery ecosystem as we witness an adjustment to the temporary new normal operating environment.
First I would underscore that the current cobot 19 surge.
Likely indicates that our country and national health care ecosystem.
We'll be under some amount of continued strength over the coming months that said a lot has changed since we spoke with you three months ago.
Indeed, we are encouraged as we continue to witness meaningful evidence that the healthcare provider ecosystem is significantly better equipped and better prepared to respond to the ongoing pandemic, including its treatment efficacy supply chain logistics capacity planning and broader operational optimal.
Nation. Likewise, we have observed that the majority of our customers and prospects have started to also focus meaningful mindshare beyond their cobot 18 response as Dave effectively adjusted financially and operationally and have started to refocus on broader clinical financial and operational improvement work once again.
Now let me provide some commentary on what this new normal operating environment means for our business in the near term.
First we're fortunate to have a highly recurring revenue model.
In which greater than 90% of a revenue is recurring in nature.
This model means that the impact to covert 19 on our top line will be relatively muted in 2020 to that effect you will hear more from Patrick later in the call when he shares our updated full year 2020 guidance.
As it relates to our existing customer relationships, let me first share some color as it relates to our technology to start I would highlight we benefit from a high level of technology revenue predictability, especially our all access das subscription customers that have built in contractual technology revenue escalators.
I'm pleased to report that since the onset of Coca 19.
Our customers overall usage of our data platform has never been higher.
Of particular note our foundational analytics applications, which are crucial components are Coca 19 technology response have seen a significant increase in usage, averaging a roughly roughly 30% increase since the onset of the pandemic.
Additionally, I would share that we have seen usage of our cobot 19 specific products meaningfully shift from those focus on koby 19 preparedness to those focused on the financial recovery and planning analytics in areas, such as elective procedures ambulatory care and revenue cycle.
Given all these factors, we would anticipate minimal impact on or technology dollar <unk> dollar based retention as a result of cover 19.
Moving on to professional services, we continue to see extremely high levels of engagement of our team member base. Many of which are engaged on covered 19 recovery focused work, but also many of which are back to focusing on more general clinical financial and operational improvement work.
As mentioned on our last earnings call, we anticipated, providing some proactive and temporary professional services discounts to our existing customers, helping to support them through their short term covered 19 related financial strain in the spirit of a long term partnership.
I'm happy to share that we have worked through those discussions and that they were very well received.
As you'll hear more from Patrick as anticipated, we experienced a decline in our professional services gross margin in Q2 as a result of those temporary discounts and we'd expect a smaller spillover impact on our Q3 professional services gross margin.
Given this we'd anticipate our near term professional services dollar based retention to be lower than our expectations at the beginning of the year.
Now, let me transition to providing some commentary on new das subscription customer additions in 2020.
First I would share that we were pleased to sign multiple new customers year to date, including after the onset of covered 19.
In particular I would highlight that we recently added one of the 20 largest health systems in the country as a new das subscription customer. We're honored that this health system is chosen help catalyst as their enterprise analytics solution.
While we were excited to add multiple new customers. During the first half of 2020 I would share that more generally we saw a purchasing pause starting in late Q1.
Given this consistent with the color that we shared on our last earnings call. Our first half 2020 number of net new das subscription customer additions was meaningfully lower than we originally anticipated entering the year.
As we enter the second half of 2020, we're encouraged by our pipeline.
We would characterize our pipeline is being as robust as the same period last year with the overall tone of the conversations and momentum of our sales processes being positive given this data we would anticipate strong bookings conversion in the second half of 2020 similar to last years levels. While also.
Acknowledging that the cobot 19 situation means that we are in unprecedented times and thus our historical conversion rates may be less predictive that in the past.
Moving onto the long term longer term impact of cover 19.
I would reiterate our sentiment from our last earnings call first I would share that we cannot think of any event in recent history that has galvanized the awareness and importance of data and analytics more than covered 19.
Thus, we believe it will serve as a meaningful tailwind in the industry's adoption of data and analytics at the health system level. We are seeing cobot 19, highlighting the need for a commercial grade data and analytic solution to replace patchwork homegrown systems I.
I would also share that we're seeing the potential for meaningful government investment in healthcare data and analytics infrastructure modernization overtime.
Lastly, I'd share that we anticipate a meaningful long term impact on our life Sciences business as we leverage one of the largest clinically rich repositories of health data in the world for real World insights.
Also in the context of our growth efforts. Let me next mentioned that we're looking forward to hosting our seventh annual healthcare analytics summit in September while the format will be virtual this year. We continue to believe that this conference represents a meaningful opportunity for help catalyst to continue to provide thought leadership.
Within the healthcare data and analytics ecosystem, while carefully listening to our customers and prospects as we further cultivate and deepening those relationships.
The theme of this year's conference will be healthcare analytics in the new normal and we're fortunate to feature many of the leading voices in the country as or keynote speakers.
Next I'd like to make a few comments on a recent acquisition of help Finch, which we're happy to announce is officially closed first I would share that this deal is consistent with the rationale that we provided for our convertible debt raise in April help fences, a SaaS technology provider of an integration engine delivering insights and analytics.
Into EMR work flows in real time.
This acquisition highlights health catalyst ability to integrate and scale software applications on top of our das platform.
To help Finch technology will serve up actionable insights derived from Dawson other help catalyst analytics applications into the MSR at the point of care of particular importance and excitement is the strong mission and cultural alignment with the help Finch team, we're thrilled to welcome the talented and diverse health.
It's team to help catalyst further enabling their mission to be the catalyst for massive measurable data informed healthcare improvement.
Next let me make some comments on our announcement today of our definitive agreement to acquire vital where.
[noise] vinyl where offers or revenue workflow optimization and analytics SaaS technology solution to health care providers.
The acquisition contemplates a 120 million dollar price purchase price.
Consisting of 70 million in cash from the balance sheet, and 50 million and help catalyst common stock.
Yes, the potential for an earn out.
We're extremely excited to announce this transaction.
First vital where provides us with another analytics application offering us a strategic anchor technology in the revenue space, expanding our CFO value proposition.
By the worst flagship offering is a best in class charge master solution that solves a complex regulatory and building function needed by all health systems.
Additionally, vital where brings to bear a meaningful upsell opportunity with new product suites in revenue integrity and price transparency.
Ultimately das will further enhance these revenue insights by seamlessly integrating billing claims pharmacy and supply data.
We also would highlight the value of vital wears compelling financial profile, which includes greater than 90% recurring technology revenue.
With approximately $19 million in 2020 estimated standalone full year recurring revenue.
And a 20 plus percent annual historical growth rate.
Additionally, vital where has approximately 75% gross margins.
And is adjusted EBITDA breakeven.
Lastly, I would highlight that our integration to vital where we will reinforce our continued commitment to our shared mission operating principles and cultural attributes, which is a requirement for every acquisition.
Please refer to our press released furnished to the FCC on form 8-K for additional information related to the vital where acquisition announcement.
Additionally, please note that our guidance figures that will be shared by Patrick at the end of our prepared remarks do not include any anticipated contribution from vital where as the transaction has not yet closed.
Lastly, let me note that the 2020 and 2021 GAAP revenue and adjusted EBITDA contribution from vital where we'll be impacted by the timing of the close of the transaction transaction and the purchase accounting impact of a deferred revenue write down.
I would also share that following the close of the vital where transaction, we anticipate having greater than 250 million of cash on our balance sheet and we continue to be active in considering other strategic acquisition opportunities both at the analytics applications layer of our stack and Interide.
Recent markets of life Sciences and international.
Lastly, before I turn the call over to Patrick I'd like to share that Todd cousins will be completing his service on our board of directors effective September one.
I want to take this opportunity to share my heartfelt gratitude for Todd and is eight years of impact will serve us on our board.
Without todd's countless contributions to our company over many years starting in its early stages I am certain that we would not be where we are today.
Patrick.
Thank you Dan.
Before diving into our quarterly financial results.
I would like to echo damn sentiment and say that I'm pleased with our second quarter results, especially in light of the macro economic backdrop.
For the second quarter of 2020.
We generated 43.3 million in total revenue.
As Dan mentioned this represents an outperformance relative to the midpoint of our guidance and it represents an increase of 18% year over year.
The year over year growth was driven primarily by recurring revenue from new customer additions.
From existing customers paying higher technology access fees as a result of contractual built in escalators.
From existing customers expanding their services relationships with us.
Technology revenue was 25.5 million, an increase of 27% compared to the same period last year.
And professional services revenue was 17.8 million, an increase of 6% year over year.
As Dan mentioned previously our professional services growth rate was meaningfully impacted by the temporary cobot 19 professional services discounts, we provided to a portion of our customer base in the second quarter.
For Q2 2020, we achieved total adjusted gross margin of 49.1% a decrease of approximately 330 basis points year over year.
On the technology side, our adjusted gross margin was 68.6% an increase of approximately 360 basis points year over year.
This year over year increase was mainly driven by existing customers paying higher technology access fees from contractual built in escalators without the corresponding increase in hosting costs, partially offset by headwinds due to the continued cost associated with transitioning a portion of our customer base.
Third party cloud hosted data centers and Microsoft Azure.
And on the professional services side, our adjusted gross margin was 21%.
This represents a decrease of approximately 1600 basis points year over year.
And a decrease of approximately 380 basis points relative to Q1 2020.
As previously mentioned this decrease was mainly the result of selected temporary discounts of our professional services as a result of covered 19.
As Dan mentioned, we believe we have worked through those discount discussions we anticipate their financial impact will have a partial spillover to Q3, Q3 2020, but to a lesser extent that in Q2.
In Q2 2020, adjusted operating expenses totaled 25.4 million.
As a percentage of revenue adjusted total operating expenses were 59%, which compares favorably to 68% in Q2 2019.
Adjusted EBITDA in Q2, 2020 was a loss of 4.2 million, which compares favorably to an adjusted EBITDA loss of 5.7 million in the second quarter of 2019.
As Dan mentioned earlier, we're pleased to report that we outperformed the midpoint of our guidance.
Adjusted EBITDA performance was mainly driven by the revenue outperformance mentioned previously as well as some non headcount expenses that we anticipate will be pushed out to the second half of 2020.
Our adjusted net loss per share in Q2, 2020, plus 15 cents.
The weighted average number of shares used in calculating adjusted net loss per share was 38.1 million.
Turning to the balance sheet. We ended the second quarter of 2020 with 353 million of cash cash equivalents and short term investments compared to 228 million at year end 2019.
As a reminder, in April 2020, we issued a private placement of convertible notes with a principal amount of 230 million.
After deducting the unamortized debt discount related to the conversion feature of 61 million.
And unamortized issuance cost of 5 million.
As of June Thirtyth 2020, the net carrying amount of the liability component is 163.5 million.
As it relates to our financial guidance for the third quarter of 2020, we expect.
Total revenue between 43 million and 46 million.
And adjusted EBITDA losses between 8.9 million and 6.9 million.
In terms of our Q3 2020 guidance I wanted to reiterate that our annual healthcare analytics summit that occurs in Q3 results in a material sales and marketing expense that will impact our adjusted EBITDA performance for the quarter.
For the full year 2020, we are providing guidance as follows.
Total revenue between 177.2 million and 181.2 million.
And adjusted EBITDA losses between 25.5 million and 22.5 million.
I'll conclude my prepared remarks by echoing Dan's comments that we are honored that our health system customers have continued to trust us to meaningfully support them in this time of great need and we take that responsibility very seriously.
Dan.
Thanks, Patrick.
I'll conclude my commentary by thanking our committed and highly engaged team members. These teammates and colleagues have worked tirelessly over the last several months in support of our hero UC health system customers in response to cover the 19.
And I've never been more proud to be associated with these teammates as we work together to fulfill the company's mission a mission that is more relevant and important now than ever.
Okay.
And with that.
We are ready for questions.
Thank you actually our lender to ask a question you'll need to press star one on your telephone sure, which I questioned touched upon key please stand by what we compare the Q1 day roster. Our first question comes from Robert Jones with Goldman Sachs. Your line is now open.
Great. Thanks for the questions I guess, maybe just to start.
Clearly hearing from hospital systems, and other hospital facing a key.
Companies that Theres, a slowdown in decision, making don't think that would come as a huge surprise to anyone.
So I'm just curious kind of what your line of sight is through the ended the year clearly the numbers call for some sequential improvement.
And then I guess related to that Dan you commented about das adds this year being.
Expected to be below where you previously would have thought them to be any sense, you can give us as far as how we should think about that and the impact that might have on 2021 revenue.
Yeah happy to address those those items Bob.
First as it relates to.
The pipeline that we have been observing today and I would say over the past few months.
As I mentioned in our prepared remarks, we are experiencing pipeline experiencing a pipeline now that feels much like in prior years.
With that in the absence of of a pandemic like cobot. So we're seeing movement in our pipeline, we're seeing the robustness of the pipeline as I mentioned in the second half of this year that feels a great deal like it felt the second half of last year for example.
As it relates to your second question.
Specifically around the number of net new jobs subscription clients as I mentioned in my prepared remarks, we were pleased to sign multiple new das subscription clients in the first half of the year, but the total was meaningfully lower than what we would normally anticipate in that first half.
As we think about the second half of the year.
All of you indications that we see now and even that we've seen over the last couple of months would suggest that we'll have a very similar performance in the second half of this year.
As compares to this the second half of last year.
And so if you combine those two we we might expect.
Net number of das subscription clients in 2020, given the pandemic in the high single digits.
Okay. That's helpful. And then I guess, maybe just one on vital where you mentioned, it's in a 100 and over 150 hospitals. Today. So just this just curious if you could talk a little bit about the cross sell roadmap opportunity and then as you think about what they bring.
To the table relative to legacy health catalyst do you think this is an area.
Now as you think about servicing the hospital CFO that you have a full offering or is this is this an area where you feel like we should expect maybe.
Further build out either buyer bill.
As it relates to not to think servicing more and more on the financial revenue side.
Yeah, absolutely so as it relates to our strategic rationale for vinyl where.
We view das as a data platform that can help across all of the major drivers of value that a health system CEO and C suite executive team needs to care about now our AR.
In addition, our beginnings as a company focused a lot on quality improvement clinical improvement and Thats clearly going to be a continued focus and we have a number of beachheads. If you think about our technology capabilities to enable through data and analytics real meaningful quality improvement also from a cost.
Perspective, we've benefited from the Corus line of activity based costing as a meaningful anchor or beachhead in the in the cost.
Related drivers that C suite executives that helps US me to care about we view vital where as an important beachhead from a technology application suite perspective in the revenue side of that equation we've had.
Some complementary capabilities at the data platform later and capabilities at the services expertise layer, but we've lacked that technology application beach head that vital where really provides us and importantly, with that beachhead in place and coupling that with our expertise in the revenue space, we can now leverage.
Much more significantly the power of Das, where we can deliver clinical insights cost insight into the revenue decision, making process in an integrated way leveraging the power of das.
And do things that that.
Couldn't be done before this integration and that's one of the reasons. We're most excited about this.
Integration and why we believe from a cross sell perspective that there'll be meaningful cross sell opportunities in both directions, both our help catalyst das subscription base being very excited about adding.
Real capabilities real technology capabilities in that revenue side of the equation and likewise with vital where.
Clients now, we havent opportunity through the power of Das to offer more use cases, where we can integrate data in the cost and the quality rooms and help them in other ways from a revenue perspective. So we do believe this is a significant step forward and we're really excited about it Patrick anything you'd add and as far as.
The overlap between our two customer base as.
Since we had $65 subscription customers at the end of last year.
Health catalyst off is still fairly underpenetrated in the market and it means there's relatively little customer overlap and significant bidirectional cross sell opportunity.
Got it Thats all very helpful. Thank you.
Thank you. Our next question comes from and Samuel with JP Morgan. Your line is now open.
Hi, guys. Thanks for taking the question.
Just following up to Bob's question on pipeline conversion for those that are pushing their decisions out.
Indicated at all what metrics with catalyzed them to move forward with you and then just thinking about the model for next year do you expect any of those delayed conversions to come through in the first half of next year to kind of.
With that 2021 growth.
Yes, certainly any.
As it relates to the to the pipeline conversion, we certainly saw a pause in many of our conversations starting in late Q1 and continuing in early Q2, but I would characterize our conversations over the last few months across our pipeline has been.
Okay, very productive and positive and moving at a rate that we've we would typically see in in a normal year and so we have seen.
From a health system financial health perspective.
Their financial.
Performance improved meaningfully as they've rescheduled these elective procedures and in many cases.
Or improvement in terms of their revenue performance and overall performance has been ahead of what was originally forecasted and as a result.
We believe that has already catalyzed.
The pipeline to be behaving much more like what we would experience absent a pandemic.
And as it relates to the way that this might play out while there may be some catch up in late 2020, and perhaps into early 2021, where we see an acceleration and some time made up during that Paas point of a few months.
It will likely be many other cases and our default assumption is that essentially we just experienced a couple of month delay in most conversations that then has picked up.
And we'll we'll follow a normal conversion timeline that we've experienced historically.
That's really helpful. Thank you and then I guess, maybe is there anymore color you can provide around professional services, but just any kind of improving the third quarter and should that be gone by the fourth quarter.
Thanks.
Yes, absolutely.
We do view the conversations that we had where we were proactively offering.
Limited near term discounts.
Usually for a month or a couple of months as being largely behind US now the impact of those as Patrick mentioned in his prepared remarks, we'll have some spillover effect in Q3, although.
Much less than what we've experienced in Q2, but those conversations have completed that they've been completed and now we're moving forward across our client base in a much more typical normal fashion from a pricing perspective.
Very helpful. Thanks, guys.
Thank you.
Next question comes from Ryan Daniels with William Blair. Your line is now open.
Hey, guys. Thanks for taking the question and congratulations on the count scores regarding the employee engagement.
I wanted to ask another follow up on the loss as I know you said you expect high single digits. This year.
Historically in the year like this we might be looking for low to mid teens, but I think the hard part for US is analysts and investors is gauging the size of those potential relationships as you've mentioned that one is with a top 20 health system and obviously that's much larger.
Perhaps a single client so Patrick can you maybe speak to the potential revenue.
Signed versus.
The year might look like versus just simple number of clients.
Yes of course happy to.
We shared previously that an average new das subscription customer starts out a little more than 10 million a half a year of recurring revenue split roughly equally between technology and services to your point Ryan.
The exact price point will be dependent on the range of applications. They would like to have access to and range of services as well as the size of that customer. So there can be some variability.
On a year to year basis as of now we would expect our pipeline from a new customer annual recurring revenue size perspective to be roughly similar to what it was in prior years.
That's very helpful color then.
You see any momentum towards different type of models I know you offer attending.
Let's take model versus the Dawson then.
Digital software applications are you seeing any trends towards either one of those from the client base.
And your conversations or new clients looking maybe start.
Levels and I'm talking more about that.
Given your answers prior question, what do you sense.
Future Thanks, guys.
Absolutely. So I think we would characterize the current pipeline and the discussions that we're having as very similar to what we've experienced historically with with one note and that is that as we acquire new capabilities those new capabilities that we're bringing largely at the.
Slayer are typically outside of the all access das subscription contract and so they do represent an incremental.
Opportunity for expansion.
Thank you for the color.
Thank you Sir our next question comes from Sean Leerink. Let's please proceed ma'am your line is now open.
Hi, Thanks, one more if I could on that the deals that you signed so far to date are any of these das like clients and in particular was that large one is that a full das or is that das light.
They have been full das subscription clients, including that top 20 health system.
Okay. That's helpful. Thank you.
And then a question on the new version of the population health platform that came out.
I guess about a month ago or six weeks ago.
Curious any early feedback on this and there was some chatter out there on challenges with the prior version and maybe some reparations made to clients as a result, just curious what the what the extended that was how the launch in the new platform as Gill.
Absolutely thanks for the questions Sean.
As it relates to our care management.
Application suite.
And maybe in the broader context.
About four or five years ago held catalyst began in earnest to build applications at that application suite level.
And actually the first application suite that we started with was care management and so in many ways, we feel grateful for all the learnings that we've we've had as it relates to version one of the care management solution and there are certainly were a number of learnings as we.
We started the rollout of care management version, one with Alpha and beta clients. We discovered a few issues that we felt we needed to address before a more broad rollout.
And we.
Identified those issues before they were apparent to our clients, but consistent with the help catalyst way the mission operating principles and cultural attributes of the company, we felt that absolutely the right thing to do would be to.
Be transparent with fees alpha and beta clients in highlighting some of the shortcomings that we were seeing and then standing behind our commitment to help them.
By addressing those issues in our second version and all along the way.
Some of those challenges that we face and care management have informed our work in other application suite categories that have successfully rolled out since that first version of care management.
And really across the other application suites, we've been really pleased with the robustness of the technology and the significance of the adoption and we can trace a lot of that success back to the learnings that we applied from care management version, two dato is already being rolled out to those alpha and beta clients.
As a replacement diversion, one and we've also seen meaningful interest across our existing client base as well as with regards to prospects and we're excited about a significant step forward and capabilities that version two of care management represent.
That's great and congrats on that thank you.
Thanks, John Thanks, Thank you.
Our next question comes from Sandy Jay fairly Truest Security. Your line is now open.
Thank you very much maybe a question on the them I guess two questions on the margin side, so probably for Patrick on the professional services understandably, a pretty big drop through.
On the discounting and that makes sense, but as you come back up do you think is it realistic to by the fourth quarter of this year get back up to more normalized margin or should we think about that and 21 and can you remind me is I'm just looking back.
Vessel margins were close to 35% non-GAAP in 19 up from 29, what do you said in terms of what it would be a normal tight gross margin think about once you need through the.
Through that.
Pass this sort of discounting states.
Yes of course happy to provide some color.
Our professional services gross margin is primarily driven by a few factors one.
The near term.
Professional services discounts that we provided to a portion of our customers that as we mentioned.
Has a GAAP revenue gross margin impact in Q2 of this year, a smaller GAAP revenue and gross margin impact in Q3 of this year.
And then we'll be through those professional services discounts.
Another main driver a professor of our professional services gross margin is the mix between a few different professional services revenue streams, there's higher gross margin data and analytics and improvement services and then there's lower gross margin implementation and outsource services.
The mix between those types of services. We shared earlier. This year is the reason why we expected our professional services gross margin this year to be in the Twentyth.
Obviously, the near term professional services Combet related discounts in Q2, and Q3 brought up from Q2 brought that down to the low twentys.
For the rest of the year, we would expect debt.
The increase slightly due to the cobot related discounts rolling off.
And the mix would habit be somewhere in the twentys.
As far as our long term professional services gross margin target. It's in the mid Thirtys and we continue to feel good about those long term targets.
Okay, Great that's helpful and then.
On the technology side, it's actually coming in a little bit better I may have missed under system. Prior comment I sort of thought with the as your hosting et cetera that we weren't really going to see much if any gross margin expansion and on the technology side and it looks like we're tracking to see some.
So maybe guest was there anything different there that things are playing out better maybe I just missed modeled it and then thinking about longer term I know you're still a couple of years away, but could we actually see margin expansion.
When you without had until you fully get off to having multiple you the higher cost of Badger plus the private cloud and all that.
Yes, any thanks for noticing we've certainly been working hard on our side.
To provide our technology in a scalable of away as possible to our customers that has led to strong technology gross margins over the last couple of quarters. We will continue to try to do our best to achieve strong technology.
Gross margins, but I would highlight that they're headwind is still ahead of us continuing to move handful of customers that are in our private cloud and on premise to the Microsoft Azure environment.
Got it thanks for the questions.
Thanks, Thank you.
Our next question comes and Elizabeth Anderson with Evercore. Your line is now open.
Hi, guys. Thanks. So the question on question about the beta.
Our acquisition. So in terms of integration can you talk to us a little bit more about how you see that integration in terms of like timeline, and then sort of how you that and conservative what's the timeline session. The cross sell opportunity. Thanks.
Absolutely.
As we think about.
The approached integration our organizational structure helps us to.
To move forward in an expedited fashion and the fact that we're making these acquisitions at the apps layer where.
Our apps are designed to work really well with our opened scalable flexible data platform. It enables technology and data integration to to also be seamless and straightforward.
From an organizational perspective.
A few years ago, we shifted towards business unit oriented structure and we have a business that is focused on the value proposition for the CFO and the financially oriented.
Solutions that we can bring and this vital where acquisition will fit within that business unit function and really accelerate and and strengthen the value proposition that we can offer to cfos on the revenue and the cost side of the equation. So thats how were going to approach integration we've already.
Done a great deal of work in planning that integration from team member perspective, and we've already also began the process of thinking about.
Client communication, then and the way in which we can enable clients both have helped catalyst das subscription.
Capabilities as well as vital where clients to tap into.
So what is now more broadly available and as one data point on the open adaptable nature of Das.
We closed the able health acquisition earlier this year and just a few months later, we were feeding able health data and insights from dos.
At a customer where we implemented able help.
So in a very short amount of time, we were able to seamlessly integrate data and insights between those two products.
Okay. That's that's really helpful and I know you still get an island has all the other question about the Polish Covance demand.
Hi, you're seeing that inflect could you also it is there any changes to sort of the reasons that customers come to you post Covanta would you say it sort of similar to what you saw critical bad.
So many of the same the same reasons, so applied I would say.
There are a couple of amplified reasons.
That cobot has highlighted.
And particularly at the Das platform layer I think we've seen an increase in awareness that a patchwork home grown datawarehouse solution just does not scale in situations like a pandemic response and the need for a commercial grade data platform.
That is built on scalable technology and that can flexibly enable lots of hypotheses to be tested and develop to the apps layer.
Is it is required it's not optional anymore. So that's probably the most meaningful shifts that I think cove. It has.
Has highlighted and enabled but but still many of the other use cases.
Prior to cope with still apply as well.
Okay perfect. Thank you Thats very helpful.
Thank you.
Our next question comes from Stephanie Davis with SPD Link your line is now open.
Hey, guys. Congrats Mclaren. Thank you for taking my question.
So you reinstated 2020 gross Greg.
Thank you effectively in line with your core growth for the year, excluding new win it by despite calling out some new wins.
So is this because the discounting is offsetting the win is there a longer ramp up period conservatism or something else.
Help me reconcile less.
Yes, I'll share a few thoughts and then and then Patrick please feel free.
The guidance that we provided.
As part of the prepared remarks, and the press release.
As you I'm sure notices is quite close to the original full year guidance that we provided before the cobot 19 pandemic.
Only within a few percentage points from an overall revenue perspective so.
The updated guidance post cobot is very close.
To the overall level and.
And so we have experience as we mentioned a couple of month.
Impact and delay and we've spoken to the the impact on net new to us subscription clients and tried to provide some visibility in guidance as to how we would think about that playing out in 2020 and then we've also shared some commentary with regards to existing clients, where we've seen continued robustness as it relates to the technology.
Dollar based that retention and we've absolutely experienced.
Due to those near term discounts that we provided to our professional services.
Rates with existing clients and a negative impact as it relates to the professional services celebrates net retention those would be the two components that would drive.
The lowering of the 2020 forecast, but I would also just harken back to the it's within just a couple of percentage points of the original revenue guidance.
Putting another way Ella Patrick continuing that al I'll keep that you guys.
[laughter].
The only item I would add is as we think about our revenue streams in the second half of the year.
We would continue to believe that our technology revenue stream will be very robust given that our technology dollar base net retention has been minimally impacted from Cogan, we would expect sequential quarter over quarter growth in the second half the year.
And primarily.
The lower second half year over year revenue growth is driven by lower professional services year over year revenue growth in the second half the year.
Yes understood is I think I know the and into the follow up question Bye.
And your guidance is close to the visual died that comes after a very healthy for the so it implies single digit growth in your fourth quarter is that entirely on the professional services side or is anything else going on you there.
The vast majority of that implies year over year lower growth is from lower professional services year over year growth I would just reiterate that hour.
Our technology.
Revenue stream from a second half perspective, we expect to be very robust and if you think about the reasons why professional services year over year revenue growth is lower in the second half the year. It is a little bit in Q3 that code that related professional services discounts. It's the lower dollar base net retention that.
We spoke about and it's also lower implementation revenue from signing fewer new das subscription customers throughout 2020.
Okay. That's helpful. Thank you.
Thanks, Stephanie.
Thank you.
Thank you. Our next question comes from Richard close with Canaccord. Your line is now open.
Great. Thanks, Congratulations on the corridor in the acquisitions.
So first on the new Dos just to go back there I think last quarter you mentioned.
Based on the level of your discussions.
People in the pipeline you thought you may be.
May have the opportunity to pull forward some deals from 2021 into the fourth quarter and so.
Curious.
Whether.
That can occur and is that part of the.
Expectations for the second half dos new clients.
Absolutely Richard.
So as we as we did mention that that that is a possibility.
And that could happen I would reiterate that that could happen, but our default position.
I would be an expectation that the primary impact it will experience is more just a couple of months delay and then reengagement that follows the same kind of pattern. So while there could be.
Case, or a couple of cases, where we do experienced an acceleration.
Our default forecast assumption is that really we've just experienced a delay.
And that's how we're thinking about it.
Okay. That's helpful.
And then as we think about vital where.
Assuming no overlap.
In the 150 clients with.
No help catalyst.
Base and then you got mid this cities 60 clients that I think you said were in your sweet spot there.
I guess the combination gives you a 200 more than 200 plus clients to cross sell.
Are we thinking about that correctly and then what do you think the timeline is to be unable to sell dos and too.
Quite aware and then any update on mid this city success.
Yes, thank you for that.
A question Richard so.
We had a strategic level and help catalyst believe that a number of the acquisitions that we have pursued.
Have a common characteristics and that they they offer us.
A relationship.
With a broader number of health system clients.
And by virtue of that relationship interesting opportunities, both with our core existing client base to expand.
Within those existing relationships as well as an open door now to cross sell other solutions into.
These clients that we have we've acquired their solutions to be part of help catalyst. So this is not only the case with vital where it's the case with help Finch with able health and really an important part of of the thesis statement of of much of our end.
M&A activity, especially at the apps flare and those those two categories that we've described where we can make an acquisition that that accelerates and existing application suite or we can make an acquisition that brings us into a new application suite still within our core market.
And so we do believe that that general thesis of cross sell is very important and it's an area of focus for us to execute well against.
Both with vital where but with every acquisition that we that we contemplate.
Okay. Thank you.
Thank you. Our next question comes from David Grossman Stifel. Your line is now open.
Thank you.
You've already been asked a lot about.
Pipeline and conversion and it's given us some very helpful data points.
But I was just wondering as we look at that fourth quarter run rate should we be factoring in just the the cadence of signings and just the timing of when they're coming on and how that may impact the fourth quarter run rate seems to be what it would be in prior years and as we think about that professionals.
Versus business going into next year is there any reason to believe that if we are returning to a more normalized environment, even if it's a new one.
That the professional services revenue retention Wouldnt return again to a more normalized rate and 2021.
Yes, I'll comment on the on the second question and then Patrick if you want to.
Add anything to that question and address the first question as well as we think about the for professional services business.
As Patrick mentioned, there are some near term impacts related to because those covert discounts that we anticipate go away.
We'll see some spillover in Q3, but largely as we think about Q4 and moving forward as I mentioned before those those conversations have been completed.
And we've returned to a normal state.
So that first factor should go away and we'll be back to a more normal set of variables in Q4 and beyond.
The second set of variables. However.
We will remain with us and be a dynamic that that we believe will play out.
In multiple ways across a range of of outcomes.
Relative to the mix of services and we try to keep our focus on what we need to do to enable massive measurable improvement at our clients and sometimes that dictates more of a mix of the of the higher end higher gross margin data science and analytics services and other cases it dictates.
Yes to shift more of the mix towards the lower end implementation and outsource services and we allow the mission orientation of the company and the focus on our clients long term success to really dictate what that right mix might look like in each period of time and so when we've talked him.
Currently and I would just restate and reemphasize.
The way, we think about professional services as a facilitator of measurable improvement and as such we would we would continue to provide a perspective that that we may see meaningful changes quarter to quarter in terms of the of the gross margin of professional services mainly drew.
And by mix all the way from the Twentys from a gross margin perspective up to the mid Thirtys and you have seen that across.
These last several quarters as we've been a public company that that we've we've experienced that full range.
Patrick and on your first question, David Youre thinking about a crack that that obviously, our fourth quarter GAAP revenue run rate is dependent on the timing of new customer adds throughout the year on our last earnings call. We shared that in a typical year.
Our waiting of new client adds is weighted towards Q2, and Q4, approximately 40% of our new client adds occur in Q2, approximately 40% in Q4 and importantly, those new client adds are typically at the end of a quarter. So the GAAP revenue benefit of new client adds typically doesn't occur until.
The following quarter.
And that is the case in our guidance as well as in the 2020, new das customers that we are expecting that in the second half of the year. The vast majority of revenue contribution from those new customers will not flow onto our income statement until 2021.
Okay, Great got it thanks very much for that color.
Of course.
Thank you and next question and Yoko slate with Citi. Your line is now open.
Hi, guys. Thanks for taking the question.
I'll pile onto the questions around.
At this year and next you mentioned in your prepared remarks, or maybe it wasn't answering question that you expect to close a similar amount of clients. The back half of this year versus 2019, which if I kind of apply the cadence that that Patrick just mentioned two 2009.
Teen would mean, probably adding around six or seven new clients in the back half.
Of this year.
In my thinking about that correctly does that mean you added around two to three.
Das clients in the first half.
This year and as we think about das clients added in the aggregate over 2020 and 2021, how does that compare to your expectations.
Co bid.
Absolutely Daniel.
So I think the framing that you described is a good framing.
Last year that in the year 2019, we share that we added 15 net new das subscription clients. So.
And as Patrick mentioned, that's fairly equally weighted typically historically between the first half in the second half so a reasonable assumption would be somewhere around half of that would have been experience through the second half of last year in and as we mentioned, we see the pipeline likely.
Playing out similarly, this half this second half as what we experienced last second half and in the first half as we shared we were pleased to sign multiple new das subscription clients.
But that that number of new das subscription clients was meaningfully lower than what we would typically experience. So that's that's where we get to an overall guide in in the high single digits for 2020 and as it relates to 2021, given what we're experiencing now in terms of the pipe.
Fine behavior being very consistent with what we have experienced in previous years, we would we would think about future.
Years in a similar way that we thought about prior years.
Got it Okay, and then maybe just stay a modeling follow up for you Patrick you mentioned that.
You expect some non headcount expenses to be pushed that the second half of of this year.
Can you go into a little more detailing what that is and what line item that will show up in the income statement.
Of course, so the.
The vast majority of our expenses are associated with headcount salary wages and benefits, but we do have a minority but material portion of our expenses there associated with non head count. This includes third party consultants.
Sales and marketing and the like.
And those non head count expenses generally show up across our various opex categories.
So you'll see the movement from up some non headcount expenses from the first half to the second half across all three of those categories.
Gotcha. Thanks.
Thank you and next question comes from David a question with Daddy. Your line is now open.
Hi, just one more question on the professional services, sorry about that with which the sequential decline in Prof services was there any decline in likes a number of hours billed for the amount of work done.
Or was it was it all entirely due to a temporarily reduced price so when that price comes back up.
The revenue should sort of normalized stacks.
Absolutely David.
I would characterize the the level of work that our team members were performing.
Over the timeframe of coded as being very similar to the level of work and utilization that that we normally experience. So really what what is showing up from a financial perspective is the impact of those discounts.
Okay. So didn't have anything to do with like being able to access the hospitals themselves because of social distancing are way. What have you is it was simply price, which will come back up okay.
And then the team.
Great. Okay, and then with the vital where acquisition like charge Masters, obviously of high interest to Cfos sounds to me like you're getting deeper or could get deeper into Rev cycle you have.
Denials management patient access managed care contracting there's a whole bunch of different solutions that can add cash.
It's the hospitals from Cfos perspective is that the direction that you're moving in which quite frankly, I think makes a lot of sense.
We agree with your assessment David.
One of the elements that we found really attractive about.
The vital were acquisition is it does give us a beachhead in an area, where we could we could acquire a company with a best in class product in a category like charge Master that is a must have for cfos.
But an area, where we could we could be the the industry leader with the best product in this space and then.
The opportunity presents itself for us to do more and this is where we can bring some of that complimentary capability, especially when you think about our our native strengths as a company at integrating data from many different sources and the impact that capability can have in other areas of red.
The new and revenue cycle, coupled with our domain expertise it felt like having a beachhead of technology capability would open up other use cases other opportunities for us to be very helpful to a CFO.
Okay, great. Thanks very much.
Yes.
Thank you and next question comes from Sean Dodge with RBC capital markets. Your line is now open.
Thanks. Good afternoon, maybe just a quick went on on mid density is been anything over the last few months has changed your view there is the expectation still for for long run flat to declining revenue or as a pandemic done anything that either stabilizer or accelerate the.
The deterioration or expecting there.
No.
We continue to to see that.
That integration is proceeding according to our planning and forecasting.
The relationships are maintaining in a very similar way to what we had forecasted as well.
We do believe that that the pandemic at a long term level highlights the importance of interoperability the importance of data sharing across organizational boundaries and so that that is a tailwind as it relates to really highlighting the value of those interoperability capability.
And we certainly want to be in a position long term, having embedded those interoperability capabilities into our data platform to offer a very compelling industry, leading solution in that regard to long term, we do see some meaningful tailwinds there.
Great.
Thanks again.
Thanks.
Thank you and then next question comes from John Ransom with Raymond James Your line is now open.
Hey.
Just kind of stepping back.
What do you think.
Your biggest ask will be from your customers.
Over the next six to 12 months versus say, what it was and better times.
Yes, thank you for that.
What I would share would be.
That in many ways I feel like we've we've already had that conversation.
And and I personally have that conversation with many C suite executives that at many of our clients.
What I would share would be that.
That.
We tried to be proactive in anticipating what our customers needed. Both in terms of the solutions that we quickly developed and as we've shared previously we have well over 100 instances of our covert 19 specific solutions being adopted in implemented across our client base, but also anticipate.
During the financial.
Strain that they were experiencing really in late Q1, and early Q2 and proactively offering up those professional services discounts as I mentioned in my prepared remarks.
That decision was very mission consistent very consistent with this long term customer focus and it was very warmly received it strengthened in reinforced the relationship between us our clients and I think it's one of the reasons why we found that weve they appreciated that near term help.
And they also we're ready to move back to the more sustainable pricing for professional services. For example that that we had pre covance 19, it didnt ask for more.
Which we appreciate it and.
And I think I would anticipate given that we're also trying to really deeply understand how each of our clients financial situation is evolving and as I mentioned before that that in many cases.
We are seeing our clients outperforming their adjusted forecast in terms of how quickly they were able to to relaunch those elective procedures and we try to help them very specifically with Coca 19 specific elements like a shared in my prepared remarks.
And they are ahead of schedule and the recovery has been a better than than what we all would have anticipated back in the April timeframe or even the early may timeframe. As a result, we are seeing.
Our robust pipeline of opportunity, both with existing clients and with with prospects and those conversations seem to be progressing at about the same pace that weve that we've seen before.
Right. So just a follow up so in the age of zoom and staying at home you've got this big New cross sell opportunity, but how do you close that sale when you're just meeting a stranger on the Internet connection and you don't have the vital person to person contact you think that the cross sell happened as quickly are you.
Thinking that this.
Zoom World is temporary and you'll be back on planes and face to face overtime.
Yeah, Great question.
I think one of the benefit that we have.
First with our with our existing client basis, we have multiyear deep relationships and often across many functional areas. Many suite C suite executive relationships and so in a situation where you can't get on a plane you already have really significant meaningful relationships already built.
The other piece that is helpful is through these acquisitions.
One of the elements that we care a lot about is the strength of the customer relationships that these companies that we consider acquiring have developed and as is the case for example is vital where they were the highest rated.
Product in their space from a customer satisfaction perspective, and so being able to leverage those existing relationships in a situation where you can't travel is really helpful and the last thing I'm not sure is.
Our delivery model on a pro services side before the pandemic was already almost all remote based.
And and as a result, it back to David's question just prior to yours.
We really didnt variance any interruption in our ability to provide the services to our clients.
That that other services models might have experienced and then the last thing I might share is as I mentioned in my prepared remarks. This year's health care analytics summit, which is our seventh annual summer there will be hosting for the first time will be virtual only and we will miss that.
Experience of everyone coming to Salt Lake City, and having a shared experience together, but there are some upsides as well so the hotel venue that we typically use has a fire marshal imposed limit it to the number of people that can fit in their largest hall.
Which is typically around that 1500 level, which is which was the attendance was sold out last year typically sells out we're all already with the virtual healthcare analytics summit, well above that registered in total well above 2000 registered. So this this help kind of like some it will be I think by far the.
The highest attended some of that we've ever had because its virtual and so we're trying to to make lemonade and understand ways in which we can we can leverage our capabilities in this new normal environment and still really meaningfully move forward.
Thanks, so much.
Of course.
Thank you I'm not showing any further questions at this time.
I would now like to turn call back, but to CEO 10 buttons for closing remarks.
Thank you and thank you to all of those who have attended our earnings conference call. We appreciate your interest. We appreciate your support and we look forward to keeping you apprised of our developments in the future take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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